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Crude Markets Retrace Gains as Market Awaits Iranian Response

Crude markets retrace gains as market awaits Iranian response


WTI crude futures have now retraced over 50% of their gains which followed the US assassination of Iranian General Soleimani.


For now, some element of geopolitical risk premium remains priced in, as markets await the Iranian response to the killing, although it seems likely that the more time passes without a response, the more the bid in crude will fade, as we have already seen. Geopolitical observers have noted that Iran is likely taking its time in choosing how best to respond, as leadership is less impulsive than its US counterpart (Trump).


So, what kind of response might we see?


Anything that amounts to an act of war against the US seems unlikely, as Iran knows it is out gunned. So that rules out anything along the lines of the Iranian Revolutionary Guard striking US targets in the Middle East with missiles.


What is highly likely, however, is that they may pursue such attacks but via the cover of “proxies”, i.e. providing foreign, sympathetic militias, such as the various Shia militias in Iraq or Houthi rebels in Yemen, with weaponry to carry out such attacks.


There could be a repeat of attacks against the oil infrastructure of US allies such as Saudi Arabia. The Saudi’s recovered quickly last time, but the attack did prove how vulnerable their infrastructure is to disruption. However, a move on this kind of scale would likely prompt a heavy US response, which could lead to further escalation and bring war closer. For this reason, Iran may favour other means.


An alternative, therefore, could be to disrupt the flow of oil as it passes through the Strait of Hormuz along Iran’s southern coastline. Iran could harass tanker as they pass, as they have done in the recent past. However, any Iranian Revolutionary guard operations in international waters however would be at risk of being attacked by US forces.


In my opinion, much of Iran’s response is likely to focus of undermining the US presence in Iraq. We noted yesterday, the Iraqi Parliament’s vote to essential end the US presence in Iraq presents an opportunity to Iran; with the US presence in Iraq gone, or at least weakened, Iran backed Shia militias will be able to fill the power vacuum.


Although the removal of the US presence in Iraq would be a long process, it would represent a significant geopolitical blow to the US, not least because of the loss of control over the countries oil supplies, but also in the gains it would have the US’ strategic rivals Russia and China, who are likely to fill the void alongside Iran. This would indeed be fitting revenge for the killing of Soleimani.


In the meantime, I expect tensions between the US and Iraqi locals to remain high, and clashes with militias to continue/escalate.


With so many uncertainties it is hard to speculate as the way the market would react to such responses. The first few I mentioned would likely create a larger, short-term bullish response in the oil market. However, we have seen the crude markets quickly fade such events.


The long process of a US withdrawal from Iraq, and the eventual sanctions on Iraqi oil exports that would likely follow, would likely be a more powerful upside catalyst (as long as there is no full-blown war with Iran in the interim) but would happen over a much longer period of time.


Discussing the impact of U.S. - Iran tensions:

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